Storm in the ports

Riddled with nepotism, inflated wages and low productivity, Israel’s ports have fallen behind and their inefficiency is costing consumers billions

By SHLOMO MAITAL
Haifa port 521 (photo credit: LIAT COLLINS)
Haifa port 521
(photo credit: LIAT COLLINS)
“Any port in a storm” goes a popular expression. In other words, when you’re in serious trouble, accept any solution. But in Israel, the storm is in the ports and no one seems to have a good solution.
The troubled Ashdod and Haifa ports are riddled with nepotism, inflated wages, low productivity, labor unrest and aggressive unions. And to top it all, they are no longer able to handle the largest container ships now plying the world’s main trading routes. The consequence may leave Israel dependent on other ports, in Egypt and Turkey – Islamic nations increasingly hostile to Israel – for handling much of its exports and imports.
Antitrust Authority head Prof. David Gilo weighs declaring the Haifa and Ashdod port companies monopolistic.
A report released in April by the Antitrust Authority reveals that Israel’s two main ports are 30 percent less efficient than similarsized ports abroad. The annual cost of this inefficiency – some 5 billion shekels ($1.38 billion) the report states – comes directly out of consumers’ pockets, through higher prices of finished goods and the raw materials used to make them.
At a time when embattled working folk are being hit hard by budget cuts and tax hikes, the balagan (chaos) i n t he p orts t ranslates directly into higher cost of living. Two years ago, social protesters managed to roll back increases in the price of cottage cheese.
They would have done better to tackle the outrageous, and far more costly, behavior of the port workers. Some 40 percent of the gross domestic product (GDP) is comprised of exports, and over 95 percent of imports and exports go through the country’s two main ports.
For 65 years, governments have struggled to reform the ports but have been stymied by militant unions. The most recent attempt at reform, in 2005, was led by Prime Minister Benjamin Netanyahu himself, in his capacity as finance minister. That reform effort set up independent, government-owned port companies in Haifa and Ashdod to spur competition between the two facilities, and also paid port workers NIS 100,000 ($28,000) each to agree not to strike. Nevertheless, “working to rule” and unofficial work slowdowns continued.
Now, the Netanyahu government is gearing up for a new attempt to clean up the ports, led by Transportation Minister Israel Katz. But will it succeed? Israel’s ports are a prime example of a serious affliction ‒ national economic schizophrenia.
There are two Israels. One is the creative, jazzy, technology-intensive Israel in which young entrepreneurs can create a smartphone application to guide people to their destinations called Waze, quickly capture 50 million users, and sell it to Google for over $1 billion, along with a condition that the company’s R&D operations remain in Israel for at least three years.
The other Israel is that of the two ports, the Israel Electric Corporation (IEC) and other government-run businesses. Two years ago the union chief at Ashdod Port, Alon Hassan, invited fellow port workers to his daughter’s bat mitzva during work hours.
The move “nearly paralyzed one of [Israel’s] largest trade gateways,” noted Bloomberg BusinessWeek. Hassan clearly wanted to show who is boss. Exporters, importers and the Israeli consumers paid the price. Hassan suspended himself indefinitely from his job June 14, after the Government Companies Authority delivered a damning report to the attorney general detailing Hassan’s private business activities. The report raised concerns that Hassan’s business dealings harmed the port and its customers.
Israel has been left behind by a worldwide trend that has seen large ports move into the hands of private operators. In the United States, six major ports – New York, Baltimore, Miami, New Orleans Philadelphia and New Jersey, as well as operations in 16 other ports – were acquired in 2006 by Dubai Ports World (DPW). In the post-9/11 world, this aroused a furor.
The solution was to have an American firm AIG (American Insurance Group) own the port assets and have DPW operate them.
This could equally apply to Israel, where a government company owns and builds the ports infrastructure, while private operators could run at least some of the quays, spurring competition and efficiency, and reducing the unions’ stranglehold.
I spoke about this issue with my S.
Neaman Institute colleague, Prof. Yehuda Hayuth, former president of the University of Haifa and an expert and consultant on ports and shipping. Over 30 years ago, Hayuth published a landmark article in the academic journal, Economic Geography, which foretold the future.
“Ocean-borne container traffic,” Hayuth wrote, “would be concentrated in a limited number of large-scale ports ‒ dominant container ports.” These ports would handle ever-larger container ships. Hayuth also foresaw intermodal transport (a systems approach to move containers from origin to final destinations via several modes of transport, one Bill of Lading, single rate and single liability), long since adopted by leading West Coast US ports – Portland, Tacoma and Seattle, which compete with each other fiercely. Israel lacks this.
Hayuth’s predictions have come true.
Container ships these days are enormous, and ports have expanded to service them.
Part of the underlying rationale is found in high school economics. The bigger the container ship, the smaller the cost-per-slot of shipping a container ‒ known as economy of scale.
Today, Hayuth explains, shipping lines are building and operating container ships that can carry 18,000 TEUs (20-foot containers).
These giant ships are 23 containers wide and many already ply the seas. They can dock only at the largest, most modern ports. Neither Haifa nor Ashdod qualifies.
Currently, Israeli ports can handle ships carrying up to only about 10,000 containers.
Israel has literally missed the boat.
The largest trade route in the world today is the Asia-Mideast-Europe route. Hayuth explains that MSC (Mediterranean Shipping Company), the second-largest shipping line in the world, recently opened a trading route from four Chinese ports and Singapore to Haifa and then on to New York.
This is good news. But it may be shortlived.
MSC, Maersk and other big shipping lines are shifting to the 18,000-container giants. Haifa can’t handle them. But Egypt’s main port, Port Said, can. Port Said is an efficient, privatized port, handling about four million containers yearly, nearly four times that of Haifa or Ashdod. If ships dock there rather than at an Israeli port, and offload their containers to smaller feeder ships that can dock in Haifa, there are major security implications, not just economic ones. How willing is Israel to have its imports and exports controlled by Egypt? Shippers have two major reasons to avoid Ashdod and Haifa. The unions cause high costs and long delays, and the infrastructure is outdated. Transport Minister Katz proposes to tackle both problems in one swoop. On July 1, the government is planning to issue two tenders to build and operate a new port, in Ashdod or Haifa. The port will be privately run and operated, circumventing the tough unions, though the costly infrastructure investment will be paid for by the government. The new facility will compete with the less efficient existing ports. The theory behind the move is that competition will force the moribund unions to modernize and improve their productivity.
Economy and Commerce Minister Naftali Bennett strongly supports the idea, and Katz is trying hard to “Be like Kahlon” (The Jerusalem Report, June 26, 2012). Moshe Kahlon was the communications minister who radically lowered cellphone costs by opening the industry to new competitors.
This move is long overdue; Israel’s ports have fallen behind, both in their ability to handle large ships, and in their efficiency in loading and unloading them. Union leaders have vowed to stymie any attempt at privatization. Hayuth is not certain the new port will fully solve the problem; nonetheless, he supports the construction of the new port.
Hayuth recalls how former British prime minister Margaret Thatcher did what Israel has so far been unable to do ‒ she simply gave port workers 10 percent of the port companies’ shares. Then, when workers went on strike, they hurt their own pockets, not just those of the capitalists and the government.
Together with Hayuth and three other colleagues, I co-signed a letter to Prime Minister Netanyahu, sent on June 4, urging that the new port be built in Haifa. We noted that Ashdod is not part of Israel’s periphery, but essentially a part of Greater Tel Aviv. The distance between Tel Aviv and Ashdod is only 29 kilometers (18 miles), or about a 30-minute drive. Building the port in Haifa would spur economic development throughout the Galilee, we noted.
According to the 2010 Logistic Performance Index (LPI), a global ranking compiled by the World Bank that measures how well goods are transported, Israel ranks only 31st in the world, just slightly ahead of Lebanon and well behind South Africa. (No 2012 data are available; apparently, the questionnaire reached Israel very late.) A simple measure of port productivity, containers loaded and unloaded per hour by a team, shows that Barcelona handles nearly 80 containers an hour, while Ashdod’s productivity, for example, is fewer than 27, lower than several other ports in the Eastern Mediterranean.
The 2012 report of the Government Companies Authority shows that Haifa Port workers earned an average of NIS 458,000 yearly ($164,000), followed closely by the Ashdod Port workers, who took home an annual average of NIS 443,300 ($158,000). This is four times the average annual wage. Port workers are therefore overpaid for underperforming. When 45 job openings for stevedores were announced this year, it’s no wonder that 3,000 job seekers applied.
Israel’s ports are just the tip of the iceberg. Despite several waves of privatization, which included the banks, El Al airlines and the ZIM shipping company, the government still runs several very large businesses, mostly in infrastructure.
According to the annual report of the Antitrust Authority, published on May 20, government-owned companies employ nearly 60,000 workers. Some are highly profitable (Rafael – Advanced Defense Systems, and IAI – Israel Aerospace Industries) because they operate in fiercely, globally competitive industries. But several ended in the red last year – IEC, which lost NIS 679 million ($190 million), Israel Railways, which dropped 268 million shekels ($72.8 million), and Israel Military Industries, which shed NIS 247 million ($69.2 million). IMI’s chronic losses have created a huge NIS 2.2 billion debt for the government; efforts thus far to privatize the company have been blocked by the Defense Ministry.
Hayuth quotes Theodore Herzl, who wrote in his book “The Jewish State” in 1896 that “it is not passengers who bring demand for trains, but rather trains that bring the passengers.” In other words, superior infrastructure creates a demand to use it. Wise governments invest ahead of the need, rather than in response to it.
Israeli governments have not been wise in port development ‒ or how the ports are operated and the investments required to remain globally competitive, efficient and modern. They have not heeded Herzl. It remains to be seen whether Katz and his determination to build a new competitive port will overcome the unions, or whether the government will continue to lag behind in the crucial race to provide competitive logistics for Israeli businesses, industry and consumers. 
Shlomo Maital is a senior research fellow at the S. Neaman Institute, at the Technion